Technical Analysis

Technical analysis. Everyone knows what this is today. 20-30 years ago it was considered some sort of magic or even “black magic.” It was revered as “the secret tool” and a way to gain an edge and make money. In some respects this was very true, technical analysis could be used to size up whatever market you were trading and get a picture as to oversold or overbought. Regular patterns would occur over and over again which gave you better “odds” while trading. This still holds true today but… to a much lesser extent and now nowhere near as good a predictive tool.

So what happened? First, technical analysis became “popular” and once everyone knows something… it becomes no longer valid or less so. Secondly and more important in my mind, fiat or fake currency as it is causes bad decision making because the values themselves become skewed or altered. Investors make bad decisions because they cannot correctly judge risk. This is illustrated today by interest rates being forced lower by the Fed when market forces would have them much higher to compensate for “risk.” A couple of examples are housing prices being as high as they still are (even after crashing) because the prices are made “affordable” by unjustifiably low interest rates. Another example is that PE ratios in the equity markets are higher than they should be because they are calculated against Treasury (supposedly risk free) interest rates. These are both “fundamental’ investment decisions made by investors that technical analysis cannot take into account.

Thirdly, when a government can create any amount of “money” that it wishes, it can use this money to “push” markets around. They cannot turn it completely upside down but they can surely “paint” and create false pictures. These false pictures are seen every single day as markets react 100% opposite to what common sense would tell you should occur. This can (and is every day) be done in the short term but cannot change the basic direction that Mother Nature would deem to be correct. These manipulations however can alter time frames by either postponing or speeding up moves in markets depending on what the manipulators deem to be for the “greater good.”

When I hear for example “Elliot wave this or Gann that” I just cringe. I cringe because two separate “experts” can read the same charts and come up with two diametrically opposed conclusions. They will talk all sorts of mumbo jumbo with long and detailed explanations to support their case. Both cases can sound logical at the same time which brings us back to “flipping a coin.” I ask you, what’s the difference between flipping a coin as to market direction or flipping a coin as to which “expert” is correct? There is no difference. You can of course follow the track records of analysts which can be helpful because some are more right than others or “recently” more right and have a hot hand. The problem with this is that their hand may all of a sudden go cold… for years to come. A couple of examples would be Elaine Garzarelli and Robert Prechter making great calls before the 1987 crash only to never be correct again. Prechter for example would have not only had you out of Gold since 1999, he would have suggested that you be short which would have caused your financial death long ago.

I thought about coupling this piece with one on “fundamentals” tomorrow but I see no need as the topic would be quite short. Yes, I believe that you absolutely MUST use the fundamentals to create your big picture and then position yourself. BUT it is very important as to how you create your big picture. You can watch the cheerleaders on CNBC and Bloomberg, take the government economic reports at face value and listen to your stockbroker who is compensated to blow smoke up your butt, make you feel good and move your money “often.” OR, you can use some common sense and believe “your own eyes!” For example, when you hear “numbers” released by the government that don’t “sound” right… they almost surely are not. Just use the common sense that you were born with and be skeptical of what you hear and read. Investigate for yourself. Dig for the truth… and THEN formulate the big picture. If you want to use technical analysis using trend lines or go contrary to an overly bullish or bearish public, great, but don’t go against the trend of your big picture. …Which is why for the last 13 years I have NEVER tried to call a “top” in Gold. My “big picture” tells me that Gold should be now and will be multiples higher than where it is today so why would I worry or try to profit from a 10% or even 20% drop. THAT is a mugs game and one that technical analysts will assure you they have mastered!

4 Comments

Robert
on January 9, 2013 at 1:50 pm

How can technical analysis have any value when the whole system is rigged? In my opinion technical analysis is of value when you have a free market, but we haven’t had a free market in a long time. The Plunge Protection Team paints a rosey picture no matter how dire it really is, but the painting is just temporary as mother nature will win in the end.

We could never pay back our debt unless we print it up and that will cause hyperinflation that would make buying even the basics of life a struggle.

Or we could default which will bring it all down immediately, therefore I think we will print until we get a 1923 Weimar, Germany right here in the USA.

If you stay in fiat paper dollars you will lose every thing. Your only hope of keeping your wealth is hard assets (i.e., gold, silver, farm land, etc.).

Unfortunately human nature usually repeats, therefore 98% of the sheeple will stay in paper until it is too late. We will not get a warning in the headlines of the newspaper. Your pay checks will be deposited on a Friday and then a collapse will occur over a weekend and the banks will be closed on Monday and you may not have access to your money for months and when you do it will buy FAR LESS than you ver imagined.

The 2% of the middle class that is stacking gold and silver may keep their wealth, but the other 98% will move into the “poor class” over a weekend!

If you don’t think that history repeats itself, then you will learn in the “school of hard knocks” !!!

Bill Holter
on January 9, 2013 at 1:57 pm

This was sort of my point…TA doesn’t/can’t work anymore. You must see the big picture and stay with it!

RE your statement: “…opposite to what common sense would tell you.” It does not seem to me that logic and reason (common sense) are even employed. I read an article this evening in the Wall Street Journal in which the author mentioned the economy’s “turn around” as if it were a happening fact. Hello!! How can the economy “turn around” when the Government’s only options are to either 1) tax businesses to death (strangle production) or 2) print more money (destroy the dollar)? It’s impossible to fix an economy employing either of these two methods. The only hope of a fix is to downsize government (cut spending). The problem with that fix is that the business of Politicians is government… thus there is no chance they are going to employ the needed spending cut tactic. To the Political Class this option would mean cutting (in affect taxing) their own business… the political will is not there / they aren’t willing to do it. BUT at some point reality will cut their spending. As Margaet Thatcher stated it, “The problem with Socialism is that, sooner or later, you run out of other people’s money.”

Bill Holter
on January 9, 2013 at 8:59 pm

absolutely correct Don.

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